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Inflation Expectations, Budget Decisions
by Scott Brown of Raymond James,
Many investors fear that the recent surge in oil prices will lead to a significant uptrend in the underlying inflation rate. However, that depends on whether inflation expectations become unanchored. There's little evidence of that so far. On the deficit, lawmakers are sharply divided on the appropriate path for government spending. However, trimming nondefense discretionary spending is not going to solve the problem.
The Philosophy of Tops
by Jeffrey Saut of Raymond James,
This week I am celebrating the two-year anniversary of the stock market's bottom by attending our institutional conference where more than 300 companies will be presenting to nearly 600 portfolio managers. It's a great conference, as well as an appropriate time to reflect on the past 24 months. Recall, the bottoming process began on October 10, 2008 when 93% of the stocks traded on the NYSE recorded new annual low prices. It was then I declared, "The bottoming process has begun."
The Job Market, Oil Prices, and the Fed
by Scott Brown of Raymond James,
Higher oil prices have raised new concerns about the strength of the economic recovery. If sustained, the rise in gasoline prices will restrain the pace of economic growth noticeably, but does not appear to be large enough (so far) to derail the expansion. Meanwhile, a federal government shutdown looms as lawmakers bicker over the future path of expenditures. Austerity at all levels of government is well-intentioned, but is not advisable at this point in the economic recovery.
Oil that is
by Jeffrey Saut of Raymond James,
?Oil that is, black gold, Texas tea,? Jed Clampett (Buddy Ebsen) got rich in the hit series The Beverly Hillbillies by discovering oil on his property. Similarly, investors have become enriched recently by owning oil stocks. Verily, crude oil has surged from ~$84 per barrel in mid-February into last week?s peak of $103.41 with an ascent for most oil stocks. As stated in Friday?s verbal strategy comments, ?Libya is particularly troubling because I think there is a fifty-fifty chance that Gaddafi, rather than cede power, will begin blowing up Libyan oil pipelines ? it?s either me or chaos.?
Oil And Vinegar
by Scott Brown of Raymond James,
Higher oil prices have raised new concerns about the strength of the economic recovery. If sustained, the rise in gasoline prices will restrain the pace of economic growth noticeably, but does not appear to be large enough (so far) to derail the expansion. Meanwhile, a federal government shutdown looms as lawmakers bicker over the future path of expenditures. Austerity at all levels of government is well-intentioned, but is not advisable at this point in the economic recovery.
The Monetary Policy Outlook
by Scott Brown of Raymond James,
Fed Chairman Bernanke is set to deliver his monetary policy testimony next week. There?s not much suspense. The release of the FOMC minutes from the January 25-26 policy meeting included senior Fed officials? revised projections of growth, unemployment, and inflation, as well as a thorough discussion of the uncertainties. No change in monetary policy is expected for some time. However, the Fed will have to consider when to lose the ?extended period? language and eventually move to a more normal policy position. That doesn?t look likely for 2011.
The Clock Has No Hands?
by Jeffrey Saut of Raymond James,
Recently, if you threw a brick out of a Wall Street window, it would go up! This stampede has not given up since it began on September 1. Indeed, the DJIA has not experienced anything more than the perfunctory 1 ? 3 session correction since this stampede began, not giving anyone an easy entry point. I was pretty constructive on stocks until the beginning of this year when I wrong footedly, like my gray-haired lunch friends, turned too cautious. Still, in this business you have to play the odds; and currently I just don?t think the odds are favorable enough to be aggressively bullish.
The Cocktail Theory
by Jeffrey Saut of Raymond James,
?How can you be sure that the pullback, you have wrongly been expecting, is for buying?? Since 1940 there has never been more than one 10% or greater pullback in a bull move; we had a 17% pullback last year between April?s high into June?s low. Moreover, the retail investor is nowhere close to fully embracing this rally, which is typically what occurs around intermediate/long-term stock market ?tops.?
Inflation Anxiety ? Misplaced?
by Scott Brown of Raymond James,
Commodity prices have moved sharply higher over the last several months, leading to increased worries that the Fed is ?behind the curve,? ?debasing the currency,? or ?monetizing the debt.? Such fears are based on a poor understanding of the inflation process and how the Fed conducts monetary policy.
It Doesn?t Take A Weatherman ...
by Scott Brown of Raymond James,
You don?t need a weatherman to know which way the economic wind blows. Lower payroll taxes will boost disposable income in 1Q11, supporting consumer spending growth. Production should advance in response to lean inventories. The pace of the recovery should pick up, but it?s still unlikely to lead to dramatic improvement in the labor market this year.
'Conversation'
by Jeffrey Saut of Raymond James,
While it?s true the DJIA and SPX have made new reaction highs many indices have not. Many emerging markets are declining, the MACD has been negatively configured since Jan 18th, Lowry?s Buying Power Index is falling and it's Selling Pressure Index is rising, and the 30-year Treasury Bond?s yield is about to break out above a spread triple top. The top gaining sector since November has been the Financials, but in the past few weeks the Financials have weakened noticeably. All of this continues to keep me cautious (but not bearish) as we enter February, a historically down month.
Contrarians!?
by Jeffrey Saut of Raymond James,
John Templeton once remarked, ?For those properly prepared in advance, a bear market in stocks is not a calamity but an opportunity.? And while I don?t think this is just a counter-trend rally in an ongoing bear market, I continue to believe we are into an uptrend within the context of the wide-swinging trading range stock market we have experienced since the turn of the century.
4Q10 GDP: Back To The Drawing Board
by Scott Brown of Raymond James,
The advance estimate of fourth quarter GDP growth was relatively close to expectations. However, two major components, net exports and the change in inventories, were much larger than anticipated (net exports added to GDP, slower inventory accumulation subtracted). Underlying domestic demand was roughly as anticipated, but the inventory story (assuming that it holds up in revisions) implies stronger growth in the near term. Instead of GDP growth of 3.0% to 3.5% in 2011 (4Q-over-4Q), it now appears more like 3.5% to 4.0%
'Fear, Hope & Greed'
by Jeffrey Saut of Raymond James,
I believe the evidence for a pullback is mounting. Since September 1, 2010, every time the Russell 2000 (RUT/773.18) has closed below its 20-day moving average (DMA), buyers have showed up the very next day. Not so last week. In fact, last week was the first down week for the SPX in eight weeks as the divergences in the stock market continue to grow. As legendary Dow Theorist Robert Rhea observed, mounting divergences suggest stocks are being distributed (read: sold) by smart money.
Fed Policy Outlook: Waiting It Out
by Scott Brown of Raymond James,
The economic outlook largely remains a good news/bad news story. The good news if that the recovery is continuing, even gathering a little more steam. The bad news is that the pace of growth is insufficient to push the unemployment rate down significantly. The Fed has a dual mandate: stable prices and maximum sustainable employment. While these goals may be seen to be in conflict from time to time, Fed officials (and most economists) believe that economic growth can be maximized over the long run by keeping inflation low.
How High is High? (To Whom?)
by Jeffrey Saut of Raymond James,
The current buying stampede is legend with the DJIA experiencing no more than three consecutive days on the downside over the past 93 sessions. This, combined with numerous other negative indicators, continues to leave me cautious in the short-term on both stocks and commodities, but not bearish. As for buy ideas, as stated I do like Tech.
TW3?!
by Jeffrey Saut of Raymond James,
?That Was The Week That Was,? also known as TW3, was a satirical TV comedy first broadcast on the BBC in November of 1962 and subsequently moved to America. The program was radical in that it chronicled events of the previous week and broke new ground in lampooning the establishment. It was also the first show to demonstrate it was truly television by allowing the cameras and boom microphones to be seen, giving the program an exciting and modern feel. I revisit TW3 this morning because despite last week?s holiday-like environment there were some pretty amazing headlines.
The December Labor Market Data
by Scott Brown of Raymond James,
The ADP estimate of private-sector payrolls rose sharply in December (+297,000), leading many economists to revise their forecasts of the official BLS payroll figure higher. Instead, the BLS data disappointed (+103,000). The unemployment rate fell sharply, generating some confusion regarding the difference between the household survey and the establishment survey. In the end, nothing much has changed in the job market outlook. Economic growth is expected to continue in 2011, just not fast enough to reduce the unemployment rate more significantly.
The White Hurricane
by Jeffrey Saut of Raymond James,
I believe that in the short-term, the odds are not tipped decidedly in investors? favor. The Volatility Index is down to ?complacency levels? last seen in April. Ditto, Investors Intelligence data shows advisory sentiment approaching the bullish extremes of October 07. Meanwhile, stock market leadership is narrowing, internal momentum is waning, and every macro sector except Utilities is overbought. Correlations between various asset classes are decreasing, implying that investors are becoming increasingly selective. All of this suggests more caution is warranted as we enter the new year.
Job Growth ? The Key To The 2011 Outlook
by Scott Brown of Raymond James,
While the outlook for economic growth has improved, a number of headwinds remain in the near term. Lingering problems in the housing sector, tighter state and local government budgets, and the decrease in the federal fiscal stimulus will restrain overall economic growth. In addition, higher gasoline prices may dampen the pace of consumer spending growth. However, stronger job growth would help counter these pressures, providing fundamental support for the housing market and helping to lift state and local government tax receipts.
Lessons
by Jeffrey Saut of Raymond James,
Lessons, I?ve learned a few over my 40 years in this business: A fool and his money are soon parted. There is no free lunch. Don?t put all your eggs in one basket. Spend interest, never principal. You cannot eat relative performance. Don?t be afraid to take a loss. Watch out for fads. Act. Take the long view. Remember the value of common sense.
Do You . . . Sincerely?!
by Jeffrey Saut of Raymond James,
For themes in 2011, I continue to embrace no double-dip recession, slow economic growth, dividend yield, stuff (energy, agriculture, water, electricity, metals, etc.), emerging/frontier markets and their consumers (although the emerging markets are well overbought currently), technology, financials, active investment management over passive (indexing), and hedging portfolios to reduce the downside risk.
What To Watch For In Early 2011
by Scott Brown of Raymond James,
One of the key themes for investors in early 2011 is likely to be a shifting economic picture. The tax cut package has taken the double-dip recession scenario off the table, but the data for the next few months are likely to be mixed, suggesting strong growth in one set of figures and more moderate growth in another. That back and forth should create some opportunities for investors.
Opposing Forces
by Scott Brown of Raymond James,
Economic recoveries are never straight-line expansions. They tend to be uneven across time and across sectors. That means a continuation of mixed economic figures over the near term and further volatility in the financial markets as investors attempt to gauge the underlying strength. Volatility creates opportunities.
Dr. Copper
by Jeffrey Saut of Raymond James,
The most important chart patterns of December (at least so far) are the charts of the 10- and 30-year Treasury bonds, whose yields have backed up more than 10% since the end of November (see the first chart on page 3). The second most impressive chart for the month is copper, which is up 10.8%. Copper is often referred to as ?Dr. Copper? for it has a better predictive record on economic growth than many economists; and last week copper came a cropper as it traded to new all-time price highs.
Festivus
by Jeffrey Saut of Raymond James,
The stock market is once again over bought so it would not surprise me to see a pause and/or pullback in the short-term. Nevertheless, I still expect the trend of buying the ?dips? to continue. Watch the Financials; they may be the key to the stock market?s near-term directionality.
Labor Market Update: Still Struggling
by Scott Brown of Raymond James,
The November Employment Report was disappointing. The holiday shopping season apparently got off to a strong start, but that failed to translate into a corresponding jump in retail employment (at least, on a seasonally adjusted basis). Manufacturing jobs were soft. State and local government continued to shed jobs, reflecting budget strains. What?s in store for 2011? The November jobs data aren?t encouraging, but the recovery is likely to remain on track.
They?!
by Jeffrey Saut of Raymond James,
Jeffrey Saut analyzes the DJAI and continuously favors the upside. Thus, he states his longstanding strategy that a "profits boom" will give way to an inventory rebuild, and then a capital expenditure cycle followed by increased hiring, and then a pickup in consumption, remains "stirred," but not shaken. As for the strongest sectors, they remain Energy, Basic Materials, and Information Technology, while the best performing market capitalization class is the mid-caps.
The Fed Under Attack
by Scott Brown of Raymond James,
Despite hopes that the anti-QE rhetoric would die down, the noise continued last week, and unfortunately, become more political. One of the key aspects of the Fed is its independence. The Fed is answerable to Congress, and ultimately, to the American people. However, it is not controlled by Congress - nor would we want it to be controlled by Congress. Attacks on the Fed and its latest round of asset purchases aren't helping
Lighten Up, Francis
by Scott Brown of Raymond James,
The increase in the deficit over the last couple of years is due largely to the recession and efforts to minimize the impact of the economic downturn. Quantitative easing isn?t some hair-brained scheme, but is simply another form of monetary policy accommodation. The dollar is down, but not out of line with its longer-term trend. Stop the hysterics, please.
Everybody?s Happy!?
by Jeffrey Saut of Raymond James,
Over the decades I have come to trust my 'day count' indicator because it has worked so well. Since the late-June ?lows? there have been ten 90% Upside Days, accompanied by strong Advance-Decline readings, reflecting the durability of this rally. In fact, the New York Composite Advance-Decline Line is well above its April rally peak and Lowry?s Buying Power Index has risen to a new rally high, while the Selling Pressure Index tagged a new reaction low, late last week. All of this only reinforces my view that any correction will be shallow and brief.
The Fed's Asset Purchases
by Scott Brown of Raymond James,
As expected, the Federal Open Market Committee has embarked on another round of planned asset purchases. There has been much criticism of the move in the financial press. Certainly, there are risks in the Fed?s strategy. However, it?s hardly reckless or ill-advised.
It's Not Nice to Fool Mother Nature
by Jeffrey Saut of Raymond James,
With per capita incomes rising rapidly in emerging countries, burgeoning food demand has left global grain consumption exceeding production; over the next few decades the situation is likely to get worse because food production needs to expand by some 50 percent just to meet the estimated demand. This means an additional 6 billion acres of land is needed to meet the upcoming food demand, but only 2 billion acres of good land is available. That should make farmland a good investment, and there are select public companies that play to this theme.
More of the Same
by Scott Brown of Raymond James,
Real GDP rose about as expected in the third quarter. Details were mixed, but remained consistent with the view that the pace of growth, while still positive, is subpar - far below a rate that would be associated with a significant reduction in unemployment. What to expect from here? More of the same, most likely. The economy continues to face a number of serious headwinds, but the recovery is likely to remain on track.
'Janitor's Job!?'
by Jeffrey Saut of Raymond James,
Eight of the S&P 500's macro sectors are currently overbought. The two that are not, Financials and Telecom, are a neutral value. Meanwhile, 88 percent of the SPX's stocks are above their respective 50-day moving averages. Equity markets are going to reach some kind of trading top over the next few weeks. Any pullback, however, will be a buying opportunity. Therefore, instead of randomly 'buying' right here, Saut prefers to wait and see which stocks resist the envisioned decline.
Key Dates Approaching
by Scott Brown of Raymond James,
The first week of November looms large for the markets. The November 2 midterm elections are expected to result in a power shift on Capitol Hill - but how much will actually change? The Fed's November 3 monetary policy decision has important implications for interest rates, the dollar, and the economy in general. The October Employment Report (due November 5) will help shape the near-term economic outlook and set expectations for future Fed policy moves.
The Fed, Inflation Expectations, and the Dollar
by Scott Brown of Raymond James,
Will they or won't they? The September 21 policy meeting minutes and comments by senior Fed officials suggest that the Federal Open Market Committee is leaning toward further monetary accommodation (specifically, additional purchases of long-term Treasury securities). However, it's not entirely settled. There are excellent arguments for doing more, but also a number of reasons for the Fed to be cautious. Most likely, the FOMC will pull the trigger on November 3. In the meantime, the uncertainty has added to the volatility in the financial markets.
'Gone in 60 Seconds'
by Jeffrey Saut of Raymond James,
The likelihood of the QE2 has risen dramatically since Ben Bernanke's Jackson Hole speech. This is being reflected by the 'stubborn rally' in most asset classes. If Bernanke did not think QE2 was needed, he surely would not allow such speculation because he does not want to surprise the various markets. Any ensuing pullback will be mild and contained above the 1130 - 1150 level on the S&P 500. Nevertheless, Jeffrey Saut is cautious, which he has not been since April.
Shrugging Off Bad News
by Jeffrey Saut of Raymond James,
With more quantitative easing on the way, the risk of another downdraft in housing has been taken off of the table. It has also boosted commodities, which is plainly good for our 'stuff stocks.' Additionally, QE2 should spur more mergers and acquisition activity, increase share repurchases, and lower the U.S. dollar (good for export companies), all of which is positive for the S&P 500.
The Job Market - More of the Same...
by Scott Brown of Raymond James,
The September employment report was a mixed bag. Growth in private-sector payrolls was not far from expectations and the August increase was revised higher. However, job growth is far below what we'd like to see. The unemployment rate held steady, but there was a large jump in the number of people working part time who would rather have full-time employment. There's nothing in the data to suggest a double-dip recession. However, more quantitative easing is on the way.
'Churn! Churn! Churn!'
by Jeffrey Saut of Raymond James,
Equity markets are churning slightly above their topside 'breakout' levels, having pierced previous reaction highs. That begs the question, 'is this an upside breakout or an upside fake out?' It is indeed an upside breakout, and there should be more upside to come. In fact, if we get through the next few weeks without some kind of major pullback, you are going to start hearing about the strong upside seasonality of November and December.
QE II Set To Sail, But How Soon?
by Scott Brown of Raymond James,
In its September 21 policy statement, the Federal Open Market Committee indicated that it was 'prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.' The key part of that phrase is 'if needed.' Growth and inflation are both too low for the Fed's comfort, but are they low enough to force the Fed's hand? Most officials appear to be leaning in the direction of further quantitative easing, but it's unclear when it will happen.
'Rules are Rules?!' (An Email From Grandma)
by Jeffrey Saut of Raymond James,
Last week most of the major stock market averages broke out of their May-September trading ranges to new recovery highs (small cap indices did not). While we are not necessarily looking at a repeat of the 2009 stock market rally, the S&P 500's April highs now seem achievable. Meanwhile, the bears continue to growl 'Where's the volume?' The reply to that question is that the whole 2009 rally came on declining volume, as did this year's May mauling, begging the question: Does volume really matter?
A Long Recovery Road
by Scott Brown of Raymond James,
It's well known that recessions caused by financial crises tend to be more severe and longer-lasting, and the recovery process is typically lengthy. In a 'typical' recession, consumers postpone purchases of homes and motor vehicles. As the economy recovers, you get a slingshot effect as that pent-up demand comes back into play. However, that's not going to happen this time. The key element in this recovery is time. Fiscal and monetary policy can help limit the downside, but there's no miracle cure. Ultimately, the recovery is dependent on the private sector.
Mr. Energy
by Jeffrey Saut of Raymond James,
According to Dow Theory, the primary trend of the stock market is 'up.' That upward trend would be reconfirmed if the Dow Jones Industrial Average and the Dow Jones Transportation Average break above their respective August 9 closing highs of 10698.75 and 4516.35. Such action would also suggest a run toward the Dow's April 26th closing high of 11205.03. Last week, however, stocks stalled around their August recovery highs. With 75.8 percent of the S&P 500's stocks above their 50-day moving averages, we are currently overbought.
The Fed Outlook: No Good Choices
by Scott Brown of Raymond James,
In his semiannual monetary policy testimony to Congress in July, Federal Reserve Chairman Ben Bernanke said that the Fed 'remains prepared to take further policy actions as needed.' In his Jackson Hole speech on August 27, he outlined possible steps the Fed could take, including expanding its holdings of longer-term securities, but cautioned that 'the expected benefits of additional stimulus from further expanding the Fed's balance sheet would have to be weighed against potential risks and costs.'
And a Partridge in a 'Pair' Tree
by Jeffrey Saut of Raymond James,
We've gone from double-dip to double-drip. While the economy is slowing, a slide back into recession is unlikely. Chances of deflation have also deflated. Meanwhile, last week the Labor Day Indicator sounded the 'all clear' signal when the S&P 500 closed higher over the four days following the holiday. Unless the S&P violates its 50-day moving average of 1085, followed by a break of 1060, the path of least resistance for stocks remains up. Still, investors continue to shun stocks, leaving the equity risk premium exceptionally large.
Mr. Market?
by Jeffrey Saut of Raymond James,
There have been two 90 percent upside days in the past few weeks combined with new highs in Lowry's buying power index and new reaction lows in the selling pressure index. Since 1940 there has never been an instance when such a configuration existed five months into a bear trend; and note that we are now five months from the April highs. Additionally, over the last 16 midterm elections the stock market has never made a new reaction low post-election day. If stocks rally during the week after Labor Day, the odds that the rally will continue are high.
August Jobs Report ? No Sign of a Double Dip
by Scott Brown of Raymond James,
As with most of the recent data reports, the August employment report was consistent with a near-term slow patch in economic growth, but not a double-dip. Private-sector growth in nonfarm payrolls remained positive, and figures for the previous two months were revised higher. However, while the job numbers were better than expected, the pace is nowhere near where we'd like it to be.
Results 1,751–1,800
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